Compound interest in simple terms means interest on interest. When the principal includes the accumulated interest of the previous periods and interest is calculated on this then they say it’s compound interest. Compounding is done on loans, deposits and investments. Frequency of compounding is basically the NUMBER of times the interest is calculated in a year. Daily, weekly, monthly, quarterly, half-yearly and annually are the most common compounding frequencies. The higher the frequency of compounding, the greater the amount of compound interest. The frequency of compounding depends on the instrument. A credit card loan is usually compounded monthly and a savings bank account is compounded daily.Albert Einstein rightly said “Compound interest is the 8th wonder of the world. He who understands it earns it and he who doesn’t pays it.” Compounding is a very powerful concept. This is because the interest of your invested money is also earning interest. The value of the investment keeps growing at a GEOMETRIC RATE (always INCREASING) than at an arithmetic rate (straight-line). Your money keeps on multiplying over a period of time. Also, if paying interest is ignored or any if there is any delay in paying the loan then the interest burden will surely be high. Also, to take advantage of compounding one has to increase their frequency of loan payments. This way they can pay lesser interest than what they are liable to pay.Investing in mutual funds is one of the easiest way of reaping the benefits of compounding. Opting to reinvest dividend or choosing a GROWTH plan results in purchasing more shares of the fund. More interest accumulates over time through the continuous purchasing and the investment will grow in value.